The Open University branch of the University and College Union
The rules on pay in lieu of notice (PILON) changed in April 2018 and now all payments in lieu of notice will be taxable, whether contractual or non-contractual.
So if someone works their notice, they will obviously be paid and taxed on their salary in the normal way up until the date of termination. Any compensation payment they are then given is tax free up to £30,000.
If someone agrees to leave and not work their full notice, then the termination payment will be regarded as 2 payments – one for PILON (equivalent to whatever the unworked notice period is) and one as compensation. The PILON element will be liable to tax and the other payment tax free to £30,000.
Further information on the HMRC website.